Chinese policymakers move to bolster economic growth as financial markets reopen

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  • Chinese financial markets will reopen today following a week-long holiday.
  • Ahead of the resumption of trade, China’s central bank has cut the required reserve ratio (RRR) for some Chinese lenders by 100 basis points from October 15, releasing 1.2 trillion yuan in cash into China’s financial system.
  • The decision is an attempt to bolster Chinese economic activity and calm investor sentiment given broad-based strength in US dollar last week.

China’s central bank, the People’s Bank of China (PBoC), has moved to bolster economic growth, announcing a cut in the amount of cash Chinese bank’s must hold in reserve for the fourth time this year on Sunday.

According to Bloomberg, citing a statement placed on the PBoC’s website, the bank will cut the required reserve ratio (RRR) for some lenders by 1 percentage point from October 15.

The cut will apply to large commercial banks, joint-stock commercial banks, city commercial banks, non-county rural commercial banks and foreign banks, the PBoC said.

The bank said it will continue to adopt prudent, neutral monetary policy.

The decision will release a total of 1.2 trillion yuan ($US175 billion) of liquidity in China’s financial system. The PBoC said 450 billion yuan of will be used to repay maturing medium-term funding facilities (MLF) owed by lenders.

The remainder will allow Chinese bank’s to boost lending to the broader economy, a move undoubtedly designed to help bolster activity levels amidst an escalation in trade tensions with the United States and previous attempts to usher through deleveraging across China’s industrial sectors.

Prior to the PBoC move, economists at Macquarie Bank said real GDP growth in China was on track to grow by around 6.5-6.6% year-on-year in the September quarter based on recent economic data, down from 6.7% in the June quarter of this year.

It said growth would “likely remain on a broad deceleration trend over the next 12 months”.

Macquarie described the risk of a targeted RRR cut as “likely”, adding it will allow lenders to extend credit to small and medium enterprises who are struggling now.

Along with helping to bolster the Chinese economy, the RRR cut may also have been designed to shore up investor sentiment ahead of the reopening of Chinese financial markets following a week-long holiday.

With US bond yields scaling multi-year highs, helping to boost the US dollar against all major currencies including the offshore traded yuan, along with recent weakness in global stocks, few were expecting Chinese financial markets to open on a firmer footing following Golden Week celebrations.

In early Asian trade, the offshore traded yuan, or CNH, has weakened modestly against the US dollar with the USD/CNH lifting to 6.9023, up 0.12% for the session.

The PBoC said the RRR cut — underlining the divergence in monetary policy between China and the US at present — would not create depreciation pressure on the yuan, adding that it would keep foreign exchange markets “stable”.

The bank will announce its daily fixing for the USD/CNY, or onshore traded yuan, just after 12.15pm AEDT today. Chinese stocks will resume trade shortly after at 12.30pm AEST.

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